Chapter 7:

Controlling
 Control
• Control: Process of ensuring that
organizational activities are going to plan.
• Controlling addresses three questions:
• Where are we now?
• Where do we want to be?
• How can we get there from here?

2
 Management Control
• Managers use information regarding
progress to:
• Prevent crises.
• Standardize outputs.
• Appraise employee performance.
• Update plans.
• Protect the organization’s assets.

3
 The Control Process
Plan Objectives

Information channels

Standards

Information channels

Information
Manager Regulator channels Sensor

Information
channels Information
channels

Inputs Activity Outputs

4
 Control
• Three requirements of control:
– Establishing standards.
– Monitoring results and comparing them to
standards.
– Correcting deviations.

5
 Correcting for Deviations
• Correction tools should have the following
characteristics:
– The tools should be used to eliminate the root causes
of a problem.
– Tools should be capable of correcting defects.
– Tools should be relatively simple and straightforward so
that all employees can use them.
– Tools should be easy for employees to tie to goals or
standards for improvement.
– Tools should be applied totally, not piecemeal.

6
 Control Tolerances
• Limitations of effective control:
– Faulty planning.
– Lack of communication within the organization.
– Need for training.
– Lack of motivation.
– Unforeseen forces outside the organization,
such as government regulation or competition.

7
The Control Pyramid

Informational
Controls

Supervisory Controls

Operator Controls

Automatic Controls

Foolproof Controls
8
 Reaction to Controls
• Guidelines for lessening negative reactions:
– Make sure the standards and associated controls are
realistic. Make sure standards are attainable yet
challenging.
– Involve employees in the control-setting process. Many
behavioral problems associated with controls result
from a lack of understanding of the nature and purpose
of the controls.
– Use controls only where needed. Periodically evaluate
the need for different controls.

9
 Types of Control
• Behavioral (personal) control
– Based on direct, personal surveillance.
• Output (impersonal) control
– Based on the measurement of outputs.
• Preliminary (steering) control
– Exercising control to prevent a problem from
occurring.

10
 Types of Control
• Concurrent (screening) control
– Designed to detect a problem as is occurs.
• Postaction control
– Designed to detect an existing or potential
problem before it gets out of hand.

11
 Types and Purposes of Budgets
Type of Budget Purpose
Revenue and Provides detail for revenue and expense
expense budget plans.
Cash budget Forecasts cash receipts and
disbursements.
Capital expenditure Outlines specific expenditures for plant,
budget equipment, and other capital items.

Production, material, Expresses physical requirements of

or time budget production, material, or time for a
specified period of time.
Balance sheet Forecasts the status of assets, liabilities,
budget and net worth at the end of the budget
period.
12
 Profitability Ratios
Ratio Calculation Purpose
Gross profit (Sales – Cost of goods sold) Indicates efficiency of
margin Sales operations and product
pricing
Net profit Net profit after tax Indicates efficiency
margin Sales after all expenses are
considered
Return on Net profit after tax Shows productivity of
assets (ROA) Total assets assets

Return in Net profit after tax Shows earnings power

equity (ROE) Stockholders’ equity of equity

13
 Liquidity & Debt Ratios
Ratio Calculation Purpose
Current ratio Current assets Shows short-run debt-
Current liabilities paying liability
Quick ratio Current assets - inventories Shows short-term
Current liabilities liquidity
Debt to Total liabilities Indicates long-term
equity Stockholders’ equity liquidity
Total debt to Total liabilities Shows percentage of
total assets Total assets assets financed
(debt ratio) through borrowing

14
 Activity Ratios

Ratio Calculation Purpose

Asset Sales Shows efficiency of
turnover Total assets asset utilization
Inventory Cost of goods sold Shows management’s
turnover Average inventory ability to control
investment in
inventory
Average Receivables x 365 days Shows effectiveness
collection Annual credit sales of collection and
period credit policies

15
 Sarbanes-Oxley Act of 2002
• Major points:
– CEOs and CFOs must certify financial statements.
– Certifying officers will face penalties for false
certification.
– Public companies generally cannot make personal
loans to executive officers or directors.
– Insiders must report any securities trading within two
business days.
– SEC may require disclosure of additional information.
– Act created several new crimes for securities violations.

16
 Break-Even Chart

12 Total
revenue
Expenses and revenues

10
Profit
Break-even point
(BEP)
8

6 Variable
costs
Total
4 cost
Loss

2 Fixed
costs

1 2 3 4 5 6 7 8 9 10
Output
17